UK pension system 'worst in Europe'Study says UK well below EU average

13 November 2007

The UK has the worst state pension system in the European Union for the second year running, a report said today.

Consultancy firm Aon Consulting said the 'inadequacy' of the UK's state pension system was 'beyond question'.

It said the state pension in this country provided workers with an income equivalent to just 17% of average earnings.

Lowest in Europe

The company said this was the lowest level in Europe and was well below the average for all EU countries of 57%.

It added that even the Netherlands, which had the second lowest level, provided a state pension equivalent to 30% of average earnings - nearly double the UK figure.

The group said only for the lowest earners, where the government has specifically targeted benefits, does the level of state pension relative to pre-retirement income start to approach the level provided by other countries.

Pension shift

Aon said for many years there had been a gradual shift in the UK pension system away from the state and towards employers and individuals making their own provisions.

But it warned that while this shift had previously been sustainable because the slack had been taken up by the private sector, this was no longer the case.

It said a spate of scandals, crises and changes to the legislation relating to pensions had jeopardised this position, generating a lack of confidence in the pensions system among both employers and individuals.

It said private pension provision remained strong at the current time due to the momentum of existing schemes.

But it warned that firms were continuing to switch from generous defined benefit schemes, under which companies state how much a pension will be worth on retirement, to less generous defined contribution ones under which firms only guarantee the contributions they will make.

Company pensions

At the same time there is a general reduction in the generosity of company pension provision.

However, the report added that some of this would be offset by the introduction of the Government's low-cost Personal Accounts in 2012, under which people who are not a member of an occupational pension scheme will be automatically opted in.

It said auto-enrolment and mandatory employer and employee contributions were set to increase the coverage of private pensions, although there is a risk that the amount of money companies pay into existing schemes could level down to just 4% of workers' pay, in line with contribution levels for Personal Accounts.

'Most affordable'

Aon said that although the UK state pension was the least adequate in Europe, it was among the most affordable in the long-term.

It said plans to increase the state pension age from 65 to 68 during the coming 30 years should help to maintain affordability, while the UK was one of only seven countries whose spending on the state pension was forecast to remain below 10% of Gross Domestic Product.

The group added relatively high levels of immigration in the UK was boosting the working age population.

The UK also has one of the highest retirement ages in Europe at an average of 62.2, with 57% of people aged between 55 and 65 still working.

It added that the UK had the third best pension in Europe in terms of affordability and sustainability, while its overall ranking taking into account all factors was fifth.

Denmark had the best overall state pension scheme, followed by the Netherlands and Sweden.